Here. Yeah, always have a minute. A minute always helps. All right, good morning, everyone, day two of Citi's Global TMT Conference. I am Asiya Merchant. I cover the tech hardware and tech supply chain here at Citi Research, so really excited to have Corning here.
I have Ed here, the CFO of Corning. We have Corning's IR and members from the other management team as well in the audience. Corning's been a great stock. You know, this fireside here is questions that I've prepared.
I'm gonna leave some time for a Q&A. However, I do request if you can please raise your hand so we can bring the mic to you. So I'm gonna turn it over to Ed first. He has some prepared comments, and then we'll get started.
Good morning, everyone. So first of all, it's great to be here today. Thanks for joining with us. I just wanna note that I may make some forward-looking statements today, and that you should review our filings on our website to see potential reasons that actual results may differ materially from the perspectives that I offer. So look forward to your questions, and thanks for joining.
All right, so I'll kick it off. You know, we've been asking all our companies, especially companies like Corning, that reported a very strong quarter with calendar 2Q. You guys are guiding to slight acceleration as well on the year-on-year growth rates. You're tracking, you know, well ahead of your risk-adjusted Springboard plan. I think it's closer to sort of the internal plan that you have with your management.
Just, Ed, as you sit here in calendar 3Q, and you reflect on all the puts and takes that were to the demand, let's say, six months ago, right? I mean, there was tariffs, there was AI rolling off, there was a whole bunch of other stuff, currencies, FX, all that stuff. You guys had yen exposure. Like, how do you think about how demand has evolved over these past few months relative to kind of what your expectations are, and as you're sitting here in calendar 3Q?
Yeah, thanks. So if I think about our markets sort of broadly and in general state, we came into the year thinking we would see growth in optical communications, some growth in specialty materials or mobile consumer electronics space, and certainly some growth in display, and I think we haven't seen a significant change in the end market demand, certainly not in display or in specialty materials. Automotive, sort of a flattish market for light-duty vehicles and down for heavy duty, and again, I don't think much has changed from the beginning of the year. The place that I would say is stronger or maybe has surprised us a little bit to the upside is in optical communications.
In the carrier space, we've seen, you know, carriers essentially deplete all of the inventory they've had, which means they're buying now to their demand level, and we're starting to see their demand or their deployment levels go up a little bit. So that's a little better maybe than when we started the year. I also think, of course, in the GenAI space, we've just seen that demand continue to accelerate and grow. So, you know, as I think about the back half of the year, six months, you know, later, the demand environment, I would say, is better than we would've said coming into the year.
Mm-hmm. Okay, and, you know, there's always concerns about regulatory stuff. I mean, we've heard a lot about China, US, you know, geopolitical conflicts. Just if you can shed some light on that, 'cause I do know you have, obviously, fabs in China. How do you guys think about your exposure to China, just broadly speaking, given the context of geopolitical con-
Yeah, I think a good way to think about Corning is, first of all, we tend to locate our manufacturing facilities where our customers are. It's acted as a nice buffer or, you know, insulated us very much from the tariffing environment. We've talked about that direct impact being very minimal, you know, $0.01-$0.02 in the second quarter is a good way to think about it, $10-$15 million of income, net income for us. Because of that, we tend to operate in an environment where the customers are making, you know, the products that we sell into are being made in that particular jurisdiction, so the geopolitics are less impactful for us, you know, really across the board, and we also are serving all of those markets.
We actually have a big business that sells into China, certainly in display, consumer electronics, and autos, and I don't think the environment has really impacted end market demand. So I talked a little bit about how we're seeing that demand really hasn't changed that much, other than in optical accelerating. I don't think anything in terms of tariffs or just geopolitics has really changed the demand environment for us.
All right. Since you talked about domestic manufacturing, I think, you know, over the summer, you guys obviously had a positive announcement as it relates to your demand for domestic manufacturing. You talked about, you know, where you're seeing strength there, and you specifically talked about your investment- that Apple's making investments in your plant in Kentucky, I believe.
Yes, where there is a lot of display glass right now that's being manufactured. Could you... I mean, when we saw that press release, we were like, "Okay, you already do a lot for Apple." Obviously, you're on all the iPhones, et cetera. But just high level, help us understand how that's incremental to your business here because they've made investments for the long term here for you.
Yeah. Maybe stepping back, we have 34 advanced manufacturing facilities in the United States. Really, the only one of our markets that isn't served out of the United States is the LCD, the display business. That's primarily an Asian-based business, China-based business. So we've actually seen an increase in inquiries and demand for our U.S. assets kind of across the board. I'm sure we'll talk a little bit about solar. We're certainly seeing demand there.
You saw the Apple announcement and maybe just a couple of, you know, comments on that announcement. Apple's committed $2.5 billion for us to make all of their cover glass and the glass for their watches, so cover glass for smartphones and the glass for their watches in our Kentucky facility, which is a significant increase in volume coming out of that facility. It allows us to invest in capital, in technology, and they're funding a lot of that investment for us.
It also allows us to increase our workforce in the U.S. and to leverage an asset that wasn't fully utilized. All that is good, but the thing that I think is probably the most important thing is we're setting up an innovation center, so we'll co-innovate with Apple for future glass compositions, future devices. It allows us to essentially be really close to a very important customer, and they're very invested in this facility.
Mm-hmm.
We'll move capacity to the U.S. We can use that capacity in other places, for example, in auto glass or, you know, for other consumer electronics customers out of Asia. So I think it's actually good financially for us in the short term and mid-term, but it's also really good in the long term because of the innovation component of that investment.
Okay. And just on that, does it free up R&D dollars that obviously, you know, Corning invests in, like you mentioned, auto glass, solar, optical. Does it free up R&D dollars that would have gone towards this consumer electronics to these other ventures that you have?
Yeah, I think it's a good way to think about it. We, we like to invest long term, so regardless of the economic cycle, we try to preserve our RD&E dollars, and even to some extent, our capital dollars. So we spend about $1 billion a year in RD&E, regardless of sort of the economic environment, because we wanna make sure that we're ready for the next technological node in whatever industry we're serving, or in certain industries where today we're not necessarily participating. So to the extent we can have customers co-innovate and help fund some of that, yes, it definitely allows us to take those dollars and put it in other places.
Okay. Just before we talk a little bit more about optical, just wanna understand, you know, recent geopolitical... I know you mentioned it hasn't been a much bigger this thing, but I think there was a press release or something out there yesterday about China, U.S., optical. You know, is this something... I know your exposure to China and optical is probably negligible or very, very low, and you can correct me there, but on display, because you have fabs in China right next to your major panel customers, does this dynamic get affected by any of the anti-dumping that's coming for optical?
No, that announcement was specifically around optical fiber, and that dumping duty has been in place, you know, before. They're just sort of updating it, and the most important thing is we're making what we sell predominantly locally, so there's really not an exposure for us in any material way f rom that duty. Doesn't really change our environment or our outlook at all.
Just to be clear, your exposure on optical fiber to China is?
Not that significant.
Yeah. Okay, that's what I remember. All right, switching to optical, I mean, that's been obviously a great story for you guys here. You've seen some M&A in this business recently.
We hosted Amphenol earlier, like yesterday as well. So just help us understand, you know, how, how material is this AI opportunity for Corning? Obviously, you've seen very strong growth. How sustainable is this growth over the next few years?
Yeah, maybe if I go back a little bit, we have an Optical Communications business that has two segments, enterprise and carrier. Our enterprise segment is predominantly data centers. If you go back to 2023, it was about $1.003 billion or so in sales. Last year, that business grew about 50%, so $2 billion or so enterprise business.
That growth was all driven by GenAI data centers. That's the sort of way to think about it. First half of this year, that level of growth continues. In fact, actually, we're growing at a higher rate than that in the first half of 2025, and we expect that growth to continue at a very good clip. You know, we'll end the year with more than a $3 billion enterprise business, right?
So that kind of growth is what we're seeing today, and I think we have pretty good visibility for the next, you know, year to two years, and I would expect the growth to continue. We put out a growth CAGR for this business about a year, maybe sixteen months ago. That was 25% over a four-year window. We upgraded that to 30%, and we've been outperforming that. So at some point in time, we'll come and update how we think about it. We don't wanna change that outlook quarterly, but clearly, you know.
Mm-hmm
... we've undershot the opportunity size there. Now, I also think if you wanna think mid-term and long-term, there's a couple ways to think about it. First of all, what's driving the growth is what we call scale out, which is essentially just building larger data centers with bigger GenAI clusters, more GPUs. That's what's really driving our growth.
That's gonna continue for, you know, certainly for the, you know, next several quarters, years, and so on. But there's an opportunity for scale up, which is, you know, optical replacing copper in the racks, kind of the early phases of co-packaged optics, and then you have generations of technology after that.
We also see that as a significant opportunity, at least as big an opportunity as our existing enterprise business, so the ability to double or triple that enterprise business, you know, by the end of the decade or, you know, certainly as you go into the beginning of the next decade. So I think there's a significant amount of growth ahead of us. Now, I always wanna be thoughtful that it won't be a straight line of growth.
We won't necessarily see, you know, 50% quarter over quarter or year over year, every single quarter, but we think the market opportunity is significant. And that is really all inside the data center, and that's part of our enterprise business. We also see growth outside the data center, data center interconnect or long haul, connecting data centers over long distances. We include those sales in our carrier segment.
Mm-hmm.
So it's, you know, still GenAI related, driving growth, but not part of that enterprise growth, you know, math I just shared.
Okay. And then just to, again, just talk about within the data centers, you have increased need for connectivity. Do you see, as we transition, you know, there's GPUs, you know, new GPU every year. There is also ASICs. Like, anything you can help us understand about the content variability between the two, as well as, you know, does each iteration of GPU, does that drive more connectivity content?
Yes. So in a GenAI data center, what's driving the scale out growth today is a combination of more GPUs, and the fact that to run a neural network, you need to actually connect every GPU to every other GPU, so it creates like a web of connectivity. So there's sort of a connectivity per device, if you want to think about it that way. There's an increase in connectivity per device for us, and you actually have more devices or more GPUs being installed. So as those technology generations increase, that also increases the amount of fiber connectors that need to go into the data center.
Mm-hmm.
When you get into co-packaged optics, which is, again, generations from now in terms of technology, we see the increase coming additionally in just more fiber, because today, some of that connectivity is copper. So you're sort of increasing the market opportunity because of the number of GPUs, the technology within the GPUs, and then the fact that that technology moves optics closer and closer to the box or in eventually inside the box.
Mm-hmm. So AI's been a great tailwind, you know, for Corning, for a lot of the other companies as well, but it's also very lumpy, right? And you can see a lot of companies talk about transitions that are happening in GPU level that ends up eventually being a tailwind, but in the near term, you know, could result in maybe underutilization of certain assets. So how do you, how do you manage that on the optical side for your business? Any kind of lumpiness, and what are you thinking about as we're doing these transitions with every chip iteration?
Yeah, I mean, generally, philosophically, we want to have all our assets full. I mean, that's kind of our mode. It's expensive to melt glass or to make fiber, so we want to put capacity in when we know we can sell it out. And we also philosophically look to get assistance from our customers to actually add capacity.
So we've kind of made our business model a lot about making sure others have an, you know, sort of a vested interest in filling our capacity, whether it's in the form of some kind of a take or pay contract or cash upfront to help us put assets in. That's just philosophically how we think about it. In optical communications, specifically, we have different types of capacity. We have connectorization, which is kind of what goes on the end of the fiber cables.
That capacity's not that expensive, and we really don't want to run out of that, so we're willing to take a little bit more risk and ensure we can capacitize. In fact, with the new products we introduced for GenAI, smaller fibers, smaller cables, and smaller connectors, we're actually continuing to ramp that capacity. It's in our current run rate because, again, the demand has sort of exceeded our expectations, if I go back, let's say, a year, year and a half ago when we introduced these products.
When we add cable or we add fiber, in particular, the cost of doing that is a little bit higher, so we'll be very thoughtful about adding the next tranche of capacity, and we'll look to de-risk it in some way, getting assistance to fund that capacity or ensuring that that capacity is sold out. Right now, we're not necessarily planning to do that, but when we do that, we'll, you know, we'll share our thoughts a little bit with you all on how we expect to sort of de-risk it.
Mm-hmm, 'cause right now you're still ramping, like you talked about.
Yeah.
Okay. On the other side, you know, on the DCI side, it was very interesting at your Investor Day where you showed, you know, where the data centers were previously just located in certain regions. Now they're being spread out across various geos, various cities, just because of power needs.
Just if you can click on that, you know, I think the Fiber World Association had some very interesting comments on how big that business could be, and I know you've talked about it at your Investor Day as well. So can you elaborate on how big this opportunity could be? It obviously sits within your carrier portion of your optical. But just if you can— 'cause this is something that's new, and that's not just the typical fiber to the home broadband that carriers are deploying. Yeah.
Yeah, I think a simple way to think about it is, it's essentially building a new long-haul network-
Right
... across the United States. We first started talking about it about a year ago. A little over a year ago, we signed a deal with Lumen. Lumen is well-positioned because they have conduit in the ground connecting a lot of major hubs across the United States... and we're supplying them with a set of products that allows them to install two to four times the amount of fiber in those conduits as they normally would, given the typical size of that long-haul cable with the advent. So we essentially took the products we invented for inside the data center and converted that to outside the data center. Now, we've actually seen that business, you know, continue to ramp, and, you know, we didn't really size it until pretty recently.
We would say it's at least a $1 billion opportunity for us by the end of the decade, and to give you some perspective, we just started shipping products in Q1 of this year. Sales, $25 million or so. We doubled our sales in Q2. We'll significantly increase our sales in Q3, and then we'll continue to ramp to that run rate over the next several quarters, years. We definitely think there will be additional customers in this space, if you will.
The end users are typically the hyperscalers that are putting in these large data centers. So I think the market opportunity is significant. We have the right technology. We're well-positioned to serve it, and I think we'll, you know, we'll continue to see that drive growth, and as you mentioned, it's in our carrier segment, so it's not part of that sort of size I gave for the enterprise business.
Right. Okay, if we can talk a little bit about margins before we go into some of the other segments. You know, there is room for margin expansion, clearly, on the optical side as we see it, especially as you're ramping utilization in some of your fabs. So just help us understand, you know, what's the margin potential that we could see on the optical segment?
Yeah, I mean, maybe for total Corning, we put out a target of 20% operating margin. We're getting pretty close to that target. If you take our Q3 guide, and you kind of reverse engineer in operating margin, we're sort of getting pretty close to that level of, of margin. A lot of that expansion, when we first put out the target, we were about 16%, so just to give you some perspective of the increase.
A lot of that has come from our optical business as sales has significantly increased. It's also come as we filled capacity that was not being utilized, which gives us great leverage point. In Optical in particular, we measure net income margin, and our net income margin is kind of in the mid-teens, and I think there's room for that business to get to a 20% net income margin, which will continue to be accretive to Corning as we go forward.
Okay. Solar, that's another one where you're seeing some benefit from domestic manufacturing. You know, people don't know a lot about solar. I think generally when you talk Corning, you talk display, optical, autos, you know, so just help us understand, what's the benefit that Corning has? Because you have this domestic manufacturing, you have polysilicon, and how big could this business be?
Yeah, so maybe for those that haven't followed, we have a business that makes polysilicon. We supply two industries, the semiconductor industry and the solar industry. That business, about $1 billion or so, about half is for semiconductor, and the rest for solar. We have been ramping and adding polysilicon capacity specifically for the solar space. That's starting to come online here in the back half of 2025. We're also moving downstream in the supply chain to make ingots, and then those get cut into wafers, t hat's the next process step in making a solar module.
We'll sell those wafers to cell makers, and then those cells go into modules. That's kind of the supply chain in solar, so just to give you a sense of what we do. We actually had a minority interest in this polysilicon business, and we were opportunistic, and we're able to to get the majority of that business in 2020. The ingots and wafers will also start to come online in the back half, probably fourth quarter, and then really ramping as we go into 2026. So our run rate, you know, about $1 billion a year, $250 million a quarter, we expect to grow that to about a $2.5 billion dollar business by the end of 2027.
Think of that as run rate, you know, end of 2027, so significant growth opportunity from our current run rate in the solar space. We're seeing a lot of other companies bring their capabilities, cell making, in particular, to the U.S. There's been a number of announcements for solar manufacturers that are gonna build facilities in the U.S. That's good for us.
We'll be the only wafer ingot maker in the U.S. You know, ingot wafer maker in the U.S., so having cell makers here is good. We recently announced a partnership with T1, which makes solar globally, but they don't manufacture in the U.S. They're gonna manufacture cells and modules in the U.S., and we also have an agreement with a company called Suniva.
Same thing, they're making cells in the U.S. So we believe there's a great opportunity for us to get into the supply chain, which is what we like to do, and then eventually we can innovate, and we think this is a space where we can bring our sort of innovation capabilities to continue to drive the life of a module or the cost of a cell or whatever it might be down and make the U.S. competitive.
I think it's important... Two, two other points. I think it's important to note that there's probably 40-50 gigawatts of installed solar capacity in the US every year, so it's a huge market. We, we will not have capacity to serve anywhere near that level of the market, so we don't necessarily need the market to grow, to be really successful. And then I, I think, you know, the other thing that is important to note is it's a very low cost of energy, so it's the lowest installed cost, more or less, of energy.
So the US needing energy, we think this remains as a, you know, very critical source as we grow the power supply in the US. And then the OBBB, which was passed, I guess, now a couple months ago, actually has some incentives in there for the incentives that matter to us, the Production Tax Credits. Those all remain in that OBBB, as they were kind of prior to that new legislation.
Okay, that's an important point. So the installed capacity, you don't think could be negatively impacted by any of the legislation that went around?
No, we actually see the industry capitalizing in the U.S.
Right.
That's what we're seeing.
Okay.
So we think what's driving that is the cost of importing has gone up significantly, so it makes manufacturing in the U.S. more competitive. And I think because it's a low cost of installed energy, it's actually relatively quick to install large amounts of capacity relative to other sources. We see this as being a critical energy supply for, you know, for the indefinite, you know, time.
Just on margins, how does that compare to your other segments, and how does that kind of factor into your target for operating margins?
Yeah, I think when this business is fully ramped, we should be at or above the Corning level of profitability.
Okay. All right. I'll ask one more on display, and then we can open it up to questions. You know, display goes a lot into TVs, consumer electronics, laptops, et cetera. There's this. And you guys are one of the leading manufacturers of display. You guys have, you know, successfully navigated through all the yen exposure.
So just help us understand, you know, the concept of pull forward, how that's affected you guys on display. How do you see it for the back half of this year? And you guys sound pretty confident on these net income margins for the display. So what's driving the sustainability, despite all the lumpiness with pull forwards, perhaps, and all the moving yen pieces?
Yeah. Maybe I'll sort of break it apart. I think with respect to demand, you know, I said at the beginning, our view on the retail market and display hasn't changed much. We don't think there's gonna be much unit growth year over year. TV units been relatively flat the last several years. But what drives growth in the market is screen size, and that continues to grow, you know, give or take an inch a year, which actually adds, you know, low- to mid-single-digit growth of glass into the industry. So that's how the market grows for us, and that affords us an opportunity to grow this business, even though units are relatively flat.
We've navigated a lot of things, including panel making, moving from places like Korea, Japan, Korea, Taiwan to China, which took place over the last four or five years, and I think you've got a relatively stable panel-making environment now, with that predominantly being in China. And as you mentioned, we're located very close to our customers. We have three large Gen 10.5 glass manufacturing facilities in China. You know, we're the market leader, lowest cost, and you know, highest best technology.
And I think that allows us to sort of create a stable environment, manage our supply, keep supply and demand relatively tight. Our competitors are not very profitable, so they tend to try to do the same thing. So it's allowed us to you know, raise price in a weak yen environment. We've hedged out for 2025 and 2026. We've got some hedges in place beyond 2026. So our goal is really to maintain our profitability at that 25% and have this business grow a little bit every year. And so far, we've executed that in 2024 and 2025 quite nicely.
Okay. And on the mobile consumer electronics, where you also have cover glass, and touch glass there, you know, any interesting products that you see on the horizon that, you know, thinks that there's great innovation that's going on here that would increase the demand in that segment?
Yeah, I mean, I think... So we're always innovating, and I think the things maybe shorter term could see more foldable phones. I mean, I think the adoption of that, I'm not the right person to determine whether consumers ultimately adopt that. But to the extent that's adopted, I think that's a great opportunity for us. We're well positioned to take advantage of that.
AR, VR, probably out, I think, several years. I don't think you're gonna necessarily see significant adoption, but that's certainly an area that's, you know, opportunity for us. And then I think there's a lot of dialogue happening now and a lot of work on the innovation side on what are the next Gen AI, you know, user interfaces, what are the devices that ultimately either replace or supplement smartphones?
We're also well positioned and working on a lot of technology there. So I think there's a nice pipeline of innovation. And of course, we continue to innovate for existing devices. And, you know, I mentioned the Apple relationship earlier. So for us, we always want to bring, you know, new glass compositions, you know, and ceramic compositions to those devices to make the devices better, to help our customers meet whatever their needs are.
So I think there's good innovation there. We can't really talk about what our customers are specifically doing. But I think we feel like the Specialty Materials business has a nice growth trajectory, so it's a spring in, like, our overall in our Springboard plan that is actually now starting to grow.
Okay. All right, let me ask if there's any questions in the audience. I have one.
Thanks. Amphenol is doing an acquisition of the CommScope fiber optic business that I think will bring them into more competition with you and scale out inside the AI data center. They've done a good job consolidating the scale-up copper market. Just any thoughts on their entrance into that market, scale out?
Yeah, I think CommScope is a competitor today. We know them very well. We compete across all applications, carrier, and enterprise with them. So I don't think it necessarily changes the, you know, environment for us in a significant way.
Any other? One more here.
I know there's tremendous growth coming in the data centers, but whatever happened to BEAD?
Yeah, BEAD is actually still in place, and there are a number of states that are slowly you know leveraging the BEAD program to do rural broadband deployments. We are participating in some of those. I think it's clearly much slower in terms of the deployments than we might have said it several years ago.
I think the good news, whether it's BEAD or otherwise, our customers have committed to continuing to deploy fiber. A lot of the large telcos have recently talked about accelerating their deployments for fiber. I mentioned earlier that we're starting to see that a little bit now.
So I think if I take data center interconnect out of the carrier business, and I think of the legacy carrier business, I think that could be a mid to high single-digit grower over the next several years. Some of that will be BEAD. You know, I don't know that BEAD's going to be as huge a catalyst maybe as we might have said several years ago, but I think there's enough opportunity despite that. Yeah.
All right. A little bit on capital allocation, Ed. I know I always bug you on that one. So, you know, you guys have obviously a lot of demand, so you have to kind of balance, you know, of my free cash flow that I generate, how much do I put into CapEx? Obviously, there is maintenance CapEx, but how much more can I put into growth CapEx, and how do I balance that, and at the same time, make sure shareholders are happy with the returns?
Yeah, our approach to capital allocation is to ensure that we always can invest for organic growth. That's our primary vector for where we want to deploy our capital. We think it creates the most value, and generally, our shareholders are confirming that for us. So we do that. We preserve our research development dollars, and we spend capital when we can.
And as I mentioned earlier, we've really tried hard to de-risk the capital aspect of that, because that's when it gets pretty expensive, when you start to put capital in the ground. So we're going to continue to do that. We always want to maintain a strong balance sheet. We actually have a pretty strong balance sheet today, an investment-grade balance sheet.
So to the extent we ever need to do anything with our balance sheet, we'll prioritize that as well, primarily because we want to invest over long cycles. So we never want to be over-levered at any point in time. Then, we take that remaining cash, and we like to reward shareholders. We have a very nice dividend.
We pay out almost $1 billion a year on our dividend, and we are committed to paying that dividend. We haven't increased it the last several years, because I'd like to grow our sort of cash flows and move the payout ratio down a little bit, maybe more like a 50% payout ratio on the dividend, but at some point, we'll certainly look to do something there. And then, of course, we'll continue to buy back shares.
We started buying back shares about five quarters ago, and we'll continue to do that as we go forward with our excess cash. Now, I didn't talk about M&A. I mean, you know, we're organic growers, so that's our primary vector, but we certainly won't, you know, rule out looking at... There's something for us to be opportunistic on, but not transformational-
Okay.
- M&A.
Great. We're almost up here on time, so I would like to thank, Ed, here. Thank you to Corning, and good luck with the rest of your meetings.
Yeah, thanks, Asiya. Thank you, all.